Hospital competition, resource allocation and quality of care.

Background: A variety of approaches have been used to contain escalating hospital costs. One
approach is intensifying price competition. The increase in price based competition, which changes
the incentives hospitals face, coupled with the fact that consumers can more easily evaluate the
quality of hotel services compared with the quality of clinical care, may lead hospitals to allocate
more resources into hotel rather than clinical services.
Methods: To test this hypothesis we studied hospitals in California in 1982 and 1989, comparing
resource allocations prior to and following selective contracting, a period during which the focus
of competition changed from quality to price. We estimated the relationship between clinical
outcomes, measured as risk-adjusted-mortality rates, and resources.
Results: In 1989, higher competition was associated with lower clinical expenditures levels
compared with 1982. The trend was stronger for non-profit hospitals. Lower clinical resource use
was associated with worse risk adjusted mortality outcomes.
Conclusions: This study raises concerns that cost reductions may be associated with increased
mortality.